New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Vector<br>Inflation Hedge&nbsp;— FY21 Result</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Vector's (VCT) move to increase its final dividend payment +0.25cps to 8.50cps (FY21 dividend 16.75cps) was a minor surprise and signalled a return to dividend growth two years earlier than we had expected. We have lifted our target price +10cps (+2.4%) to NZ$4.30 with ~+3.0% dividend forecast increases over the next three years the primary driver. The FY21 result was good, Adjusted&nbsp;EBITDA up +NZ$24m (+5%) with metering continuing the key growth driver. VCT remains a solid investment providing a reasonable dividend with inflation and interest rate hedge characteristics. NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Minor Adjusted EBITDA changes, FY22/FY23/FY24 0%/0%/+1% to NZ$523m/NZ$552m/NZ$580m</li>
<li><strong>Dividend:</strong>&nbsp;FY22/FY23/FY24 dividend increased +0.5cps (~+3.0%) per&nbsp;annum&nbsp;to 17.00cps/17.25cps/17.50cps</li>
<li><strong>Target price</strong>:&nbsp;Target price increased +10cps (+240%) to NZ$4.30</li>
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<h3>Capital contribution policy change and inflation boosts dividend outlook</h3>
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<p>Enabling VCT to increase its dividend is an improved near-term outlook. It is also a strong signal from the company that it is positive about its future and there is no credit rating downgrade risk. VCT has changed its capital contribution policy, resulting in FY21 capital contributions increasing +42% on FY20. We are forecasting a further +22% increase in FY22 after the policy has taken&nbsp;its full effect. With customers paying more&nbsp;capex&nbsp;upfront, that frees balance sheet capacity for VCT to invest further in Australian meters and to lift its dividend. In addition, the increase in inflation will boost regulatory revenue which is indexed to CPI, albeit the effects will not be seen in earnings until FY23 and FY24. We have increased our dividend forecast +0.5cps for each of FY22, FY23 and FY24.</p>
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<h3>FY21 operating result in line with expectations, but capital contributions help drive big NPAT increase</h3>
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<p>VCT reported FY21 EBITDA of NZ$514m, in line with our forecast and within its NZ$500m to NZ$520m guidance range. Normalised NPAT increased +62% (+NZ$73m) on FY20 to NZ$192m driven by an +NZ$24m increase in EBITDA, an +NZ$37m increase in capital contributions, and an -NZ$18m decline in interest costs (due to lower interest rates and&nbsp;Kapuni&nbsp;consideration). Metering continues to be&nbsp;VCT's&nbsp;main growth driver, although there was also a good contribution from the regulated Networks division.</p>
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<h3>Longer-term outlook for metering remains positive, but more cautious on future returns from the gas network</h3>
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<p>Whilst NZ has largely completed its smart meter roll out, there is still plenty of runway in Australia, with VCT expecting continued strong growth. However,&nbsp;capex&nbsp;will be elevated ~NZ$120m in total across the next three&nbsp;years as VCT upgrades the communication chip in the installed smart meter base. Of longer-term concern&nbsp;is the outlook for the gas distribution business in light of the Climate Change Commission report and the possible ban on new connections from 2025. That said, we expect&nbsp;VCT's&nbsp;electricity business to benefit and the Commerce Commission is cognisant of the issue and appears likely to enable modestly higher short-term gas revenue</p>
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Vector Inflation Hedge&nbsp;— FY21 Result

NEUTRAL
Vector's (VCT) move to increase its final dividend payment +0.25cps to 8.50cps (FY21 dividend 16.75cps) was a minor surprise and signalled a return to dividend growth two years earlier than we had expected. We have lifted our target price +10cps (+2.4%) to NZ$4.30 with ~+3.0% dividend forecast increases over the next three years the primary driver. The FY21 result was good, Adjusted&nbsp;EBITDA up +NZ$24m (+5%) with metering continuing the key growth driver. VCT remains a solid investment providing a reasonable dividend with inflation and interest rate hedge characteristics. NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;Minor Adjusted EBITDA changes, FY22/FY23/FY24 0%/0%/+1% to NZ$523m/NZ$552m/NZ$580m
Dividend:&nbsp;FY22/FY23/FY24 dividend increased +0.5cps (~+3.0%) per&nbsp;annum&nbsp;to 17.00cps/17.25cps/17.50cps
Target price:&nbsp;Target price increased +10cps (+240%) to NZ$4.30



Capital contribution policy change and inflation boosts dividend outlook


Enabling VCT to increase its dividend is an improved near-term outlook. It is also a strong signal from the company that it is positive about its future and there is no credit rating downgrade risk. VCT has changed its capital contribution policy, resulting in FY21 capital contributions increasing +42% on FY20. We are forecasting a further +22% increase in FY22 after the policy has taken&nbsp;its full effect. With customers paying more&nbsp;capex&nbsp;upfront, that frees balance sheet capacity for VCT to invest further in Australian meters and to lift its dividend. In addition, the increase in inflation will boost regulatory revenue which is indexed to CPI, albeit the effects will not be seen in earnings until FY23 and FY24. We have increased our dividend forecast +0.5cps for each of FY22, FY23 and FY24.


FY21 operating result in line with expectations, but capital contributions help drive big NPAT increase


VCT reported FY21 EBITDA of NZ$514m, in line with our forecast and within its NZ$500m to NZ$520m guidance range. Normalised NPAT increased +62% (+NZ$73m) on FY20 to NZ$192m driven by an +NZ$24m increase in EBITDA, an +NZ$37m increase in capital contributions, and an -NZ$18m decline in interest costs (due to lower interest rates and&nbsp;Kapuni&nbsp;consideration). Metering continues to be&nbsp;VCT's&nbsp;main growth driver, although there was also a good contribution from the regulated Networks division.


Longer-term outlook for metering remains positive, but more cautious on future returns from the gas network


Whilst NZ has largely completed its smart meter roll out, there is still plenty of runway in Australia, with VCT expecting continued strong growth. However,&nbsp;capex&nbsp;will be elevated ~NZ$120m in total across the next three&nbsp;years as VCT upgrades the communication chip in the installed smart meter base. Of longer-term concern&nbsp;is the outlook for the gas distribution business in light of the Climate Change Commission report and the possible ban on new connections from 2025. That said, we expect&nbsp;VCT's&nbsp;electricity business to benefit and the Commerce Commission is cognisant of the issue and appears likely to enable modestly higher short-term gas revenue


Vector Ltd

Vector: Inflation Hedge — FY21 Result